The Swedish Real Estate Market and Macroeconomic Factors
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T h e S w e d i s h R e a l E s t a t e M a r k e t a n d M a c ro e c o n o m i c F a c t o r s Bachelor Thesis in Economics Author: Sofie Karlsson 830610 Louise Nordström 770915 Tutor: Åke E Andersson, Professor Andreas Högberg, PhD Candidate Pia Juusola, PhD Candidate Jönköping Fall 2007 Bachelor Thesis within Economics Title: The Swedish Real Estate Market and Macroeconomic Factors Author: Sofie Karlsson & Louise Nordström Tutor: Åke E Andersson, Professor Andreas Högberg, PhD Candidate Pia Juusola, PhD Candidate Date: Fall 2007 Subject terms: Macroeconomic variables, multiple regression analysis, stock market, real estate market, APT, expectations Abstract The real estate market has been of great interest since the rise in home foreclosures in US, which started in the late 2006. The purpose of this thesis is to examine a possible relationship between the factors presented in DiPasquale and Wheaton’s (1996) model which explains the market linkages between the property market and asset market, and the Swedish real estate companies listed on the Swedish stock market OMX. The real estate stock market is, divided in to groups of 3, which represented the dependent variable. The repo rate, CPI, expected inflation, macro index, disposable income, GDP and a real estate price index are the explanatory variables. Stockholm Stock Market All- Share Index (OMXSPI) is also included as a possible explanatory variable. The main findings in most of the estimations for the groups and years, is that the OMXSPI is of significance at the 10 percent level. The other variables did not show any significant result based on the 10 percent significance level, According to the results it seems like the volatility has increased over time in the real estate stock market with respect to the OMXSPI. That is; the risk has increased significantly from the period 1996-1999 to the later periods. 1 Contents 1 Introduction and Research Problem................................................... 5 1.1 Purpose.......................................................................................................... 5 1.2 Disposition of the thesis................................................................................ 5 2 Bubbles and Crises – A Background................................................... 6 2.1 Tulipmania.................................................................................................... 7 2.2 The stock market crashes in New York and their effect on real estate......... 7 2.3 The savings and loan crisis in the US........................................................... 8 2.4 Japanese real estate ....................................................................................... 8 2.5 The Swedish real estate crisis 1990 .............................................................. 8 2.5.1 The crash on the Swedish market ......................................................... 9 2.6 The Asian crisis .......................................................................................... 10 2.7 Subprime mortgage..................................................................................... 11 2.8 Summary of the crises by the Mundell Fleming model.............................. 12 2.8.1 Can it happen in Sweden?................................................................... 14 2.9 The current Swedish real estate market ...................................................... 14 2.9.1 A quantitative description of the property stands (Q)......................... 14 3 Modelling The Financial Market....................................................... 17 3.1 Pricing (Pc).................................................................................................. 17 3.1.1 Pricing in the Swedish real estate market ........................................... 19 3.2 Interest rate (r) ............................................................................................ 21 3.3 Modelling of market linkages in the real estate sector ............................... 23 3.4 Expectations and forecasting errors............................................................ 25 3.5 The capital asset pricing model (CAPM) ................................................... 26 3.6 The multi factor model ............................................................................... 27 3.7 The arbitrage pricing theory (APT) ............................................................ 27 4 Method ................................................................................................. 30 4.1 Regression model........................................................................................ 30 4.2 Hypotheses.................................................................................................. 30 4.3 Dependent variables.................................................................................... 31 4.4 Independent variables ................................................................................. 31 4.5 Data collection ............................................................................................ 33 5 Results .................................................................................................. 34 6 Analysis ................................................................................................ 40 7 Conclusion and suggestion for further studies................................. 42 8 References ............................................................................................ 43 2 Appendix Appendix 1 List of contents of the group “other type of building” Equations Equation 2.1 Return Equation 3.1 NPV Equation 3.2 Asset Price Equation Equation 3.3 The Northeast quadrant Equation 3.4 The Northwest quadrant Equation 3.5 The Southwest quadrant Equation 3.6 The Southeast quadrant Equation 3.7 Change in Stock Equation 3.8 CAPM Equation 3.9 Risk Premium Equation 3.10 Multi Factor model Figures Figure 2.1 Monetary expansion under fixed exchange rate and perfect capital mobility Figure 2.2 Monetary expansion under floating exchange rate and perfect capital mobility. Figure 2.3 Division of Swedish real estate Figure 2.4 Division of Multi-dwelling and commercial buildings Figure 2.5 Division of conventional dwellings Figure 2.6 Division of public real estate Figure 2.7 Division of industrial real estate Figure 3.1 Expected Cash flow Figure 3.2 Risk/Return graph Figure 3.3 Price of Swedish real estate in relation to location. Figure 3.4 Average Prices for Conventional Dwellings 2006 Figure 3.5 Market Linkages Figure 3.6 The adjustment process in the example of change in demand for Housing. Tables Table 2.1 US households with payment problems Table 3.1 Swedish Statistics Table 3.2 Lending to Swedish households and public sector Table 4.1 Real Estate companies on the Stockholm Exchange (OMX) Table 4.2 Definition of variables Table 5.1 Regression results 1996-2007Q3 Group 1 Table 5.2 Regression results 1996-2007Q3 Group 2 Table 5.3 Regression results 1996-2007Q3 Group 3 Table 5.4 Regression results 1996-1999 Group 1 Table 5.5 Regression results 1996-1999 Group 2 3 Table 5.6 Regression results 1996-1999 Group 3 Table 5.7 Regression results 2000-2003Group 1 Table 5.8 Regression results 2000-2003Group 2 Table 5.9 Regression results 2000-2003Group 3 Table 5.10 Regression results 2004-2007Q3 Group 1 Table 5.11 Regression results 2004-2007Q3 Group 2 Table 5.12 Regression results 2004-2007Q3 Group 3 4 1 Introduction and Research Problem The crisis in the US subprime mortgage market has been a major impacting factor for the volatility on the world markets that has been going on during 2007. Loans have been given to people with poor credit records, risking being unable to pay back. This is a serious issue for the American economy, and a possible recession is likely to send shock waves around the world. During the fall, one of the hottest topics has been the real estate market and Sweden is no exception. News concerning the Swedish, the American and other European housing markets has been in the papers more or less every day. As the world has become more interrelated, information flows faster and affects not only the home market but also foreign markets. The Swedish economy is connected to the real estate market because of its size. This also means that what happens on the Swedish real estate market affects the stability of the country as well as the interest rate. For many people, buying a house is their greatest investment and also probably the most important one. So when there are disturbances in this market, it may have substantial consequences for the economy as a whole, as well as for the individual. According to DiPasquale and Wheaton (1996), the amount of real estate stock is determined on an asset market. They show the linkage from the asset market to the property market. The linkage depends on a couple of variables, which will be presented in this thesis. These variables will also be measured against the real estate companies on the stock market to see if the same applies there. Two of the most noticed topics this fall is what will be dealt with in this thesis: the real estate market and the stock market. The Swedish stock market has fluctuated a lot so it is interesting to see if real estate companies on the stock market have done the same. 1.1 Purpose The purpose of this paper is to examine if there is a relationship between the macroeconomic factors presented in DiPasquale and Wheaton’s (1996)